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News Release

Wellington

Wellington office stock feeling the effects of WAP2

The government’s accommodation reshuffle is having a flow-on effect for all Wellington office stock.


 

 

Grey Lynn office unit decked out for summer/new-zealand/en-gb/news/864/grey-lynn-office-unit-decked-out-for-summerAucklandGrey Lynn office unit decked out for summer
East Tamaki gem with new five-year lease/new-zealand/en-gb/news/863/east-tamaki-gem-with-new-five-year-leaseAucklandEast Tamaki gem with new five-year lease

​​Wellington2 small-min.jpgCommercial real estate company JLL says tenants and landlords need to be aware of what’s happening in the market and what it means for them. 

“It’s important for tenants to talk to their brokers right now. We can help them exploit the current conditions and find a better price, or better stock,” JLL leasing agent Isaac Hunter says. “They will get incentives by using a broker that they won’t otherwise get.”

The government is reconfiguring how it occupies space as it moves through the second phase of the Wellington Accommodation Project (WAP2). 

WAP2 will reduce the Crown’s rental footprint by 14,500m², which is in addition to the 121,433m² in reductions already made since 2011. 

This will have a huge effect on the Wellington commercial property market over the next two or three years, Hunter says. 

JLL tracks lease expiries in Wellington city and is forecasting big vacancies and softening of rents. 

“We have performed a study of government buildings to see who is doing what,” Hunter says. 

With several new builds on the horizon coupled with several corporates moving buildings, JLL is predicting upwards of 40,000sqm of A grade stock coming onto the market in 2017-18 and only 27,000sqm of expiry in A grade for the same period.

With so much surplus stock in the market, rents will soften across A, B and C grades.

It means that some landlords in A grade will find themselves without tenants in the short term. 

“It’s great news for many tenants as they’ll be able to upgrade to better stock,” Hunter says. 

Meanwhile there is 55,000sqm of B grade vacancy coming up, so there should be a shuffling up in this grade as well. 

“Over the next three to four years, we’ll see movement of C grade tenants into B grade, as rents soften. 

“As space tightened in the CBD, some tenants were forced out to the fringes and Te Aro, so we will likely see them migrate back as accommodation comes available.”

Some C grade buildings will likely be converted to apartments or student accommodation. 

“That’s a good thing – there’s a real shortage of student accommodation in Wellington,” he says.  

Hunter says landlords will be more aggressive from now on in attracting tenants. 

“We are already seeing landlords offer two months rent-free per year of term certain, and this will become more common as the market adjusts.”​

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Those tenants who like their buildings and want to stay can expect to get better stay-put options.

“If you stay put and don’t get a broker involved, you could find yourself in a worse position. If you talk to an expert, and go to market, you could get some time rent-free,” Hunter says. 

JLL’s senior research consultant in Wellington Chris McCashin says the Wellington office market experienced elevated levels of activity in the second half of 2015, with strong sales and new build activity. 

“Demand from the private sector for A-grade office space remains high with tenants seeking out greener, safer and more modern premises in the Wellington market.

“The Wellington office supply base has settled in the second half of 2015. Supply changes have been largely refurbishment driven. There are some new developments soon to enter the market, including the new 10,000sqm office development located on Site 10 on the waterfront. The office development is largely preleased with PWC securing naming rights and levels 3 and 4. Construction is set for 2016 with completion by mid-2018.”

The Wellington Office market had a stellar 2015, McCashin says, with NZD 560million of large transactions completed. Heated conditions in rival markets such as Auckland have seen investors searching for desired yields elsewhere, including Wellington. Average prime yields compressed further in the second half of 2015 to reach 7.9%. Yields are forecast to firm in the first half of 2016, as the number of investors seeking quality investments outside of the Auckland market increases.

In the short term, supply is forecast to decline in 2016, as office stock is taken out for government refurbishment. 

However Hunter emphasises that longer term thinking is required. 

“Get a broker involved now and take advantage of the over-supply that’s coming,” he says.